If long term GDP growth is 2.5% annually,inflation is 3% per year,the dividend yield is 4%,and short term interest rates are 6%,then

Question

Quizplus · Accepted Answer

The equity risk premium is the excess return that investors demand for investing in stocks over the risk-free rate, which is represented by short-term interest rates in this case. Therefore, the equity risk premium would be 3.5% (6% - 2.5%) as per the given information. A is incorrect because there is no information provided about inflation-adjusted capital gains. C is incorrect because the growth rate of dividends is only 4%, which is lower than the given 5% growth rate. D is incorrect because the dividend yield is 4%, implying that there are positive cash flows from dividends, and not capital losses. E is incorrect because it only takes into account the dividend yield and long-term GDP growth, and not inflation and short-term interest rates.

If Long Term GDP Growth Is 2